Ground leases are an important - if somewhat unusual - part of the real estate finance market. Because they usually cover big costly residential or commercial properties like Rockefeller Center and The Empire State Building, to name 2, and last a long period of time (99 years and approximately start) the possibility of something unanticipated or unexpected occurring is high. This probability increases drastically if, as highlighted listed below, one or both of the lease celebrations' declare insolvency. Accordingly, should take note and take care when entering into any deal involving a ground lease.

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Ground leases have actually been around because the Middle Ages and insolvency laws have actually existed considering that a minimum of Roman Times. Given this long history, it is not a surprise that a great deal of law has actually established on the interaction of bankruptcy and ground leases. This is particularly so since the advent of the "contemporary" United States Bankruptcy Act in 1898 and the comprehensive modifications to title 11 of the United States Code implemented to it in 1978, when Chapter 11 of the United States Bankruptcy Code (the "Code") was enacted. [1] In particular, Section 365 of the Code offers unique guidelines for the presumption or rejection of a ground lease-as well as its prospective sale and transfer by a debtor to a third party.

Knowing these rules is critical to any real-estate specialist. Here are the fundamentals:

A ground lease, often referred to as a "land lease," is a distinctive system for the development of industrial realty, taken pleasure in by those tasked with establishing the Rockefeller Center and the Empire State Building, for instance. The plan permits prolonged lease terms frequently as much as 99 years (with the option of renewal) for the landowner to retain ownership of the land and gather lease while the designer, in theory, may improve upon the land to its benefit too. Both historically and currently, this atypical relationship in the real estate area produces sufficient conversation weighing the structure's advantages and disadvantages, which inherently grow more made complex in the face of a ground lessor or ground lessee's personal bankruptcy.

According to a lot of courts, including the Second Circuit, the threshold question in analyzing the aforementioned possibilities concerning a ground lease in insolvency court is whether the ground lease in question is a "true lease" for the purpose of Section 365. Section 365 uses, making the ground lease eligible for, assumption or rejection, only if it is a "real lease." [2] While what precisely makes up a "real lease" will vary state by state, it is widely accepted that "the proper query for a court in determining whether § 365 [] governs a contract fixing residential or commercial property rights is whether 'the celebrations intended to enforce responsibilities and give rights significantly different from those emerging from the common landlord/tenant relationship.'" Intl. Trade Ad. v. Rensselaer Polytechnic, 936 F. 2d 744 (2d Cir. 1991). This "intent" is identified based upon that of the celebrations at the time of the lease's execution. In re Big Buck Brewery Steakhouse, Bkrptcy No. 04-56761-SWR, Case No. 05-CV-74866 (E.D. Mich. Mar. 9, 2006). Despite there being "a 'strong anticipation that a deed and lease ... are what they profess to be,'" the financial compound of the lease is the main determination of whether the lease is thought about "true" or not, and in some states (like California), is the only suitable factor to weigh. Liona Corp., N.V. v. PCH Associates (In re PCH Associates), 804 F. 2d 193 (2d Cir. 1986) pointing out Fox v. Peck Iron & Metal Co., 25 Bankr. 674, 688 (Bankr. S.D. Cal. 1982). Generally, the more away those "financial truths" are from the regular landlord/tenant relationship, the less most likely a lease will be thought about a "true lease" for the purpose of Section 365. Id. For example, if residential or commercial property was purchased by the lessor particularly for the lessee's use or solely to protect tax benefits, or for a purchase cost unassociated to the land's value, it is less most likely to be a real lease.

If the ground lease remains in fact determined to be a "real lease" (and subject to court approval), the selected trustee or debtor-in-possession in a bankruptcy case might then either presume or decline the lease as it would any other unexpired lease held by the debtor.

However, exceptions apply. These heavily count on a debtor's "appropriate assurances" to the remaining parties to the agreements. Section 365 of the Code provides that if there has actually been a default on a debtor's unexpired lease, the DIP may not assume the abovementioned lease unless, at the time of assumption, the DIP: (i) cures or provides "appropriate assurance" that they will in truth "immediately cure [] such default"